NEW TOWN — Oil drilling on the Fort Berthold Reservation could be in danger if state legislators and tribal leaders can’t reach an agreement on how to share the oil tax revenue.

Leaders of the Three Affiliated Tribes are working with state legislators to amend a 2008 agreement that Chairman Tex Hall says is unfair to the reservation.

A proposal would send more money to the reservation, but Senate Majority Leader Rich Wardner, R-Dickinson, said it has an “uphill climb” in the state Legislature if it doesn’t include a stipulation that the tribes spend a portion of the tax dollars on improving roads.

Hall and tribal leaders strongly object to the state telling the tribes how to spend their money and trying to exert jurisdiction over trust lands. One proposal called for the tribes to use 10 percent of new revenue for infrastructure, but the state has not committed to do the same with dollars generated on the reservation, Hall said.

“Why doesn’t the state be accountable for $314 million?” Hall said, referring to the amount of tax revenue the state has collected from oil wells on the reservation. “Why don’t they do 10 percent? It works both ways.”

The issue is critical for the entire state because tribal leaders have indicated in negotiations that they would break the existing agreement if a compromise isn’t reached, Wardner said. That could result in the tribes charging a tax on top of the state’s tax, making it too costly for companies to drill on the reservation.

“If the oil companies stop drilling, we all lose,” Wardner said.

The major oil companies that operate on the reservation have signed a letter supporting the tribes.

“We want more of our dollars going back to the tribal entities to address issues on the reservation,” said Ron Ness, executive director for the North Dakota Petroleum Council, an industry trade group.

Prior to the 2008 agreement, there had not been a well drilled on Fort Berthold trust lands in 27 years because of the unstable and unpredictable tax and regulatory structure, Ness said.

In 2008, the state and tribes agreed to have one tax structure with oil companies paying a 6.5 percent extraction tax and a 5 percent production tax, the same taxes that companies pay in the rest of the state.

For wells drilled on trust lands, that revenue is divided equally between the state and the tribe.

On fee lands, which are privately owned lands on the reservation, the state receives 80 percent of the production tax and the tribes receive 20 percent of that tax.

The agreement has a five-year exemption on the extraction tax on fee land, with the state receiving 100 percent of that tax after the exemption expires. Because the agreement is about five years old, the state is just starting to collect extraction tax on fee lands, Wardner said.

Under the new proposal, that five-year tax holiday would be eliminated and the state and tribes would equally split the extraction and production taxes on fee lands.

A projection by the North Dakota Tax Department estimates the tribes would receive an additional $81 million in 2013-15 and nearly $232 million in the 2015-17 biennium under the proposal.

The state is estimated to gain $6 million in 2013-15 but lose nearly $76 million in 2015-17 compared to the current agreement, according to the projections.

Legislators are in favor of dividing the tax revenue equally, but they want to see a portion of the dollars targeted for improving roads, said Wardner, R-Dickinson.

“The roads are shot up there,” Wardner said, referring to the reservation. “It (the proposal) will not pass muster in these chambers unless there’s some accountability.”

Hall said he’s asked the state to account for how it spent oil taxes generated on the reservation and didn’t get an answer.

“If you ask us how we spend our money, we get to ask you,” Hall said.

Hall points out that the reservation is not eligible to apply for state energy-impact grants, even though the reservation generates oil revenue and is experiencing the same impacts that other Oil Patch communities are.

“That’s a slap in the face,” Hall said.

Wardner said the city of New Town is eligible for the grants but has never applied.

The industry is following the negotiations closely because companies could not afford to operate on the reservation if the tribes and the state can’t agree on a single tax structure, Ness said. Already companies have additional costs to drill on tribal lands, Ness said.

“The costs become pretty much prohibitive as you add potential additional taxes on top of that,” Ness said.

House Bill 1234, which deals with several oil issues, includes a recommendation to split the oil tax revenue equally, but it does not include a requirement for the tribes to spend money on roads, Wardner said.

The Senate Finance and Taxation Committee voted 7-0 to give the bill a do pass recommendation Thursday. The amendments will be discussed on the Senate floor today, and then the bill will go to Senate Appropriations next week, Wardner said.

If the bill is approved, it will give Gov. Jack Dalrymple some parameters to work with and he will meet with tribal leaders to renegotiate the agreement, Wardner said.

Hall said tribal leaders also want to remove a clause in the agreement that gives the state jurisdiction to regulate oil and gas activities on the reservation.

If a compromise cannot be reached, the issue would come back to the tribal council and leaders would decide whether they can live with it or they could vote to terminate the agreement with the state, Hall said.

Fort Berthold had 28 drilling rigs operating during the most recent monthly update from the state Department of Mineral Resources.